REPORT | April 2020 PLAYING WITH FIRE: California’s Approach to Managing Wildfire Risks Jonathan A. Lesser Charles D. Feinstein Continental Economics VMN Group, LLC Playing with Fire: California’s Approach to Managing Wildfire Risks About the Authors Jonathan A. Lesser is president of Continental Economics, an energy and economic consulting firm, and an adjunct fellow of the Manhattan Institute. He has 35 years of experience working for regulated utilities, for government, and as a consultant. Lesser has addressed numerous economic and regulatory issues affecting the energy industry in the U.S., Canada, and Latin America. His areas of expertise include cost-benefit analysis applied to both energy and environmental policy, energy rate regulation, energy market structure, and antitrust issues. Lesser has provided expert testimony on energy-related matters before state utility commissions, the Federal Energy Regulatory Commission, international regulators, and state and federal courts. He has also testified before Congress and many state legislative committees on energy policy and regulatory issues. Lesser is the author of numerous academic and trade-press articles, and he has coauthored three textbooks. He earned a B.S. in mathematics and economics from the University of New Mexico and an M.A. and a Ph.D. in economics from the University of Washington. Charles D. Feinstein is CEO of VMN Group, LLC, a consulting firm specializing in decision sciences and applied mathematics. He has taught in the Department of Management Science and Information Systems at Santa Clara University, the Department of Management Science and Engineering at Stanford University, and the Department of Industrial Engineering and Operations Research at the University of California–Berkeley. Feinstein has more than 35 years of experience in research, teaching, and the creation and application of mathematical methods and mathematical modeling. His areas of expertise include optimization, decision analysis, system dynamics, and systems analysis. His previous employment includes positions as a senior decision analyst at Applied Decision Analysis and a research engineer at Xerox Palo Alto Research Center. Feinstein has published more than 50 technical papers and reports. He has also presented many lectures on both theoretical and applied research. Feinstein earned a B.S. in mechanical engineering from the Cooper Union for the Advancement of Science and Art, an M.S. in aeronautics/astronautics, an M.S. in mathematics, and a Ph.D. in engineering- economic systems from Stanford University. 2 Contents Executive Summary ..................................................................4 I. Background and Origins of the Preemptive Shutoff Policy ...........................................................................5 II. Measuring Physical Risk and Evaluating Risk-Management Alternatives: A Conceptual Framework ......................................9 III. Cost-Benefit Analysis of Preemptive Electric Shutoffs .....................................................................17 IV. Costs and Benefits from an Electric Utility’s Perspective .....27 V. Alternatives to Preemptive Shutoffs .....................................27 Appendix A: Utility Risk Management in California ...................29 Appendix B: The Mathematics of Calculating the Likelihood of an Electric Operations–Caused Wildfire ........30 Endnotes ................................................................................32 3 xxPlaying with Fire: California’s Approach to Managing Wildfire Risks Executive Summary In 2017 and 2018, wildfires that swept through northern California caused billions of dollars in property damages, destroyed thousands of structures, and killed more than 120 people. The 2018 Camp Fire—which killed 85 people and destroyed virtually the entire town of Paradise—was found to have been caused by faulty equipment installed and operated by Pacific Gas & Electric Company (PG&E).1 While such electric operations–related wildfires have accounted for a relatively small percentage of large wild- fires, they appear to have had above-average impacts, accounting for 10 of the 20 most destructive wildfires in the state2 and four of the 20 largest wildfires.3 The 2018 Camp Fire, which also burned more than 150,000 acres and destroyed almost 19,000 structures, was by far the deadliest and most destructive in state history. Because of the dangers posed by power lines and faulty electric equipment, the California legislature approved a protocol for electric utilities to reduce the risk of wildfires by preemptively shutting off electricity in portions of their service territories during dry and windy weather conditions.4 PG&E’s website recommends that customers prepare “for outages that could last longer than 48 hours.”5 The first such “Public Safety Power Shutoff” (PSPS) took place in September 2019, when PG&E cut power to 1,400 residential customers and businesses in Sonoma and Napa Counties. Far larger shutoffs, affecting almost 1 million PG&E customers, took place in October and November.6 Although Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E) also imposed preemptive shutoffs in autumn 2019, the numbers of affected customers were far smaller than those imposed by PG&E.7 PG&E and California governor Gavin Newsom have stated publicly that these preemptive shutoffs are necessary to ensure the safety of Californians. In early October 2019, the governor stated that the shutoffs were “the right decision.”8 Later in the month, after increasing public anger about the widespread shutoffs, Newsom assailed PG&E for mismanagement, claiming that such mismanagement was about “corporate greed meeting climate change.”9 The public protests reflect a simple fact: although preemptive shutoffs reduce the likelihood of wildfires caused by electric equipment, they impose significant costs on thousands of individuals and businesses. This report estimates the full range of societal costs and benefits from reducing the likelihood of electric opera- tions–caused wildfires to determine whether, on balance, a preemptive shutoff policy makes economic sense. We find that, except under extreme assumptions, the costs exceed the expected benefits. The reasons are: (i) the low likelihood of electric operations–caused wildfires; (ii) the relatively low expected costs of such wildfires if they do occur; and (iii) the large costs of shutoffs. We conclude by suggesting alternative approaches and policies to reduce the risks of wildfires. Key Findings: From a societal perspective, the costs to individuals PG&E has never provided cost-benefit analyses and businesses from preemptive shutoffs of electric- for any of the preemptive shutoffs that have taken ity exceed the benefits gained by reductions in the place since autumn 2019. likelihood of a wildfire, unless few customers are affected by the shutoffs. The risk of damage from wildfires in California has been exacerbated by environmental policies that From an electric utility’s perspective, preemptive prevent the clearing of dead and diseased trees shutoffs are economically rational. They reduce the from forests and limit opportunities for controlled utility’s potential liability from a wildfire caused by a burns.11 These policies increase the potential failure of, or damage to, electric operations equip- consequences of wildfires by increasing the ment, even if that equipment is working properly, quantity of available fuel. while the utility incurs no costs, other than lost reve- nues from forgone electricity sales. Hence, preemp- Preemptive shutoffs are likely to remain PG&E’s tive shutoffs are a form of low-cost insurance.10 policy of choice for the foreseeable future because the utility is neither trimming trees nor replacing The implicit justification for preemptive shutoffs ap- equipment that is in poor condition at a rate sufficient pears to be based on a worst-case assumption that to provide safe operations in a relatively short time. every electric operations–caused wildfire will cause But given public anger, whether state regulators and catastrophic damages. But the Camp Fire was an politicians will allow the company to implement these outlier; and outliers are, by their nature, rare events. widespread shutoffs in the future is unknown. 4 PLAYING WITH FIRE: California’s Approach to Managing Wildfire Risks I. Background and Origins of the Preemptive Shutoff Policy Wildfires are not new to California; hundreds occur each year. The vast majority are small, do little harm, and provide ecological benefits.12 But wildfires and humans don’t mix well. And in 2017 and 2018, California experi- enced several deadly blazes, including the 2018 Camp Fire, which killed 85 people—the deadliest wildfire in state history. Most wildfires are not caused by—or do not even involve—electric utility equipment, such as downed power lines. According to data published by the California Department of Forestry and Fire Protection (CalFire) in 2017, a particularly bad year for wildfires, there were 3,470 such blazes, of which 408 (12%) were caused by electric power equipment. Vehicles were responsible for 309 (9%), burning debris for 437 (13%), and arson for 222 (6%), among other causes.13 The causes of 871 wildfires (25%) were never determined. Moreover, wildfires that do involve electric utility equipment are typically quite small. Since 2014, electric utilities have been required to notify the California Public Utilities Commission (CPUC) of all wildfires caused